When the financing term ends, the fixed interest rate on the loan also ends. However, there is often a residual debt. Or it happens that difficulties arise with debt repayment. Therefore, for further financing, which many borrowers count on, it is necessary to renegotiate. The easiest way is refinancing and prolongation.
What is a prolongation?
Prolongation — is further financing in the event that the loan term expires and the remaining debt requires an extension of the term. With an extension, borrowers remain loyal to their bank and extend their existing mortgage for another year. The term is usually shorter than with initial financing. All previous agreements remain, except for interest. They are negotiated additionally.
Ninety days before the end of the mortgage term, borrowers receive a notice from the bank that the loan is to be extended. As a rule, the offer for an extension is made directly. However, banks are not obliged to do this. The lender only has to provide information three months before the end of the fixed-rate period about whether it is willing to grant an extension of the agreement. In addition, as a borrower, you can proactively request several comparative offers in good time.
If you agree to the financial institution's offer of an extension, you need to sign the document and send it back to your bank. Typically, you have 14 days. The new components are the interest rate and term. The repayment may remain the same or be increased to get out of debt faster. Usually, you do not need to submit any additional documents, and there is no need to re-verify your solvency.
The bank will take all the further steps and eventually send you confirmation of the continuation of the financing. This requires very little effort and nothing changes. Even the contact person usually remains the same for the following years.
Important: Extension of terms must always be in writing and signed by you. A notary certificate or change of entry in the land register is not required.
When it's time for an extension
The offer can be submitted no earlier than twelve months before the end of the financing period. A reminder is sent from the banking institution a maximum of three months before the deadline. During this time, it is worth monitoring the development of interest rates. If you expect an increase, it is worth agreeing on an extension at an early stage. If, on the contrary, you are speculating on a decrease in interest payments, you can wait and request an offer for an extension at least before the end of the fixed borrowing rate.
Advantages
Attractive to many borrowers because this form of extension is convenient. All you have to do is sign a new offer and continue making payments as usual. The benefits include:
- Quick and easy: just sign the offer.
- No change: the general arrangements remain unchanged.
- No additional costs: no stock exchange, notary, or other fees are charged for the extension.
- Free unscheduled payments: allows you to make special payments for free.
Disadvantages
It is convenient, but has one significant drawback: the possibility of missing out on a much more favorable interest rate. Banking institutions offer customers only mediocre conditions. As a result, the client saves effort, but not money. Here are the disadvantages:
- Lower interest rate: Institutions usually offer their new customers more favorable interest rates than their existing customers.
- Inability to amend the contract: inflexible. Apart from interest and term, all previous requirements remain in the old format.
- There is virtually no room for negotiation: customers have little opportunity to change loan requirements in their favor at their bank.
Prolongation as an extension of the agreement is always advisable if the interest payments offered by the bank are at the current market level. Therefore, if other banks do not offer better conditions, there is nothing stopping you from accepting the offer of a prolongation. After all, convenient registration is a clear plus. However, in practice, this is unlikely to be the case.
However, it makes sense to negotiate with the institution before initiating debt restructuring. After all, as a regular customer, you are in an advantageous position in relation to your bank: the risk of default is low, as is the administrative burden. If you also submit comparative offers, you have a good chance of getting favorable agreements. However, technically it will not be a prolongation, but a debt restructuring through your bank.
In any case, borrowers need to be well-informed to save as much money as possible. Finance experts can help you with this - they will quickly and easily find the right loan for you on the best terms.
What is refinancing?
Refinancing is the process of replacing an existing loan with a new, much more favorable one. The old one is closed completely, and a new, more favorable one is taken out in order to achieve a better financial situation. It can be useful for many reasons, in particular, if the inserts change, or more attractive conditions are offered.
To replace it, you need to sign a new loan agreement with a financial institution that is ready to offer acceptable arrangements. This is done through a comparative analysis, where you compare several providers to find the best offer. After signing the new loan agreement, the old one will be fully repaid and replaced by the new one.
This is especially useful when interest rates change and a better loan becomes available. However, it also makes sense if you need more flexibility in repaying the loan, want to get a longer term, reduce payments. However, in all cases, you should make sure that its cost is less than the savings obtained due to the more favorable interest rate.
It is also important to note: it leads to a reassessment of your credit rating, which can have a negative impact.
What to consider
There are several important factors to consider when refinancing:
- Compare offers: It is worth comparing different offers from financial institutions and lending institutions to get the best possible offer.
- Fixed interest rate: Consider whether you want fixed or floating interest rates. Fixed rates provide more planning security, but are usually a bit more expensive than floating rates.
- Payment: Ability to adjust amortization or leave it unchanged. Higher amortization results in a shorter loan term, but also involves higher monthly payments.
- Costs: It is important to consider the costs of renewing the agreement, such as commissions, and factor them into your decision.
- Contract terms: carefully read the terms of the contract, especially the clauses on special payment offers, penalties for early repayment, and the possibility of early termination of the contract.
- Expert advice: It is advisable to seek advice from a specialist to understand all aspects and make the best decision.
Interest rate
It is an important factor in refinancing and lending, as it is the level at which financial institutions are willing to borrow money to lend to their customers.
It is set by central banks and serves as a benchmark for general lending. It is also known as the base rate and directly affects the amount of interest that borrowers must pay on their obligations. Therefore, it plays an important role in calculating the cost of changing the deal.
Key differences between rollover and refinancing
Sometimes, finding themselves in a situation where the repayment terms are coming to an end, and there is still not enough money to fully close the debt, borrowers look for options to solve the problem. One of these options is to extend the term or take out a new loan to close the old one. And although both of these processes allow you to avoid penalties, they are significantly different from each other.
Prolongation is a simple increase in the period of time during which a loan must be repaid. In this case, you do not need to take out a new one, but simply agree with the financial institution on additional time to close the debt. At the same time, the requirements (interest, debt amount) remain unchanged. It is ideal for those who temporarily find themselves in a difficult financial situation, but will manage to sort everything out in the near future.
Refinancing, in turn, involves not just extending the term, but actually replacing the old contract with a new one, with possible more favorable conditions. In addition to increasing the repayment term, you can get a reduced interest rate, other payment requirements or combine several loans into one. It allows you to minimize monthly payments or simplify them, which often makes it a more attractive option for those who want to not only extend the term, but also optimize their financial obligations.
Thus, the main difference between them is that the first option only allows for an increase in the repayment time without changes, while the second one offers to improve the offers through new lending conditions.
Conclusion
Yes, these are two different debt management tools. One allows you to extend the repayment period without changing the terms of the loan, while the other allows you to replace the old debt with a new loan with improved terms, such as a lower interest rate or other benefits. When choosing between these options, it is important to consider your financial capabilities and needs to make the most beneficial choice to resolve your debt situation.
